Research shows that in April 2021, the total amount invested in building construction climbed by 6.3% to $19.9 billion in Canada. Although the construction industry contributes largely to the Canadian economy, it is considered the most difficult as several laws and standards control how things operate. They vary greatly depending on the state or region you seek to develop in. Construction projects are risky for each party involved; thus, a construction bond is prepared before the project is started to reduce the risk and provide security. As construction projects may go wrong in various ways, there is a need for different types of bonds that cover most of these scenarios and safeguard the interest of both parties.
Types of construction bonds
There are some common and some not so prevalent:
1. Bid Bond
The first stage in the construction process is to get a bid bond, which is usually required to present a proposal. This agreement protects the project owner from incurring losses if the contractors do not have sufficient funds to complete the process. The project owner can claim damages against the bid bond if a contractor wins a bid but then backs out of the project. They are used in large projects like the public sector, where bidding on the project involves vast amounts.
2. Performance bond
These bonds assure that the contracted construction project will be completed and adhere to the contract’s rules. They aid in covering losses if a contractor fails to complete a project on time or in accordance with other requirements like budget, consistency, quality, or other performance-related factors.
3. Payment bond
It ensures that contractors will be able to pay the employees and subcontractors as agreed for their work. Because many building projects don’t proceed as expected, this agreement is essential for the project owner. If a supplier hasn’t been paid for their work, they can file a claim against the bond to seek the compensation they deserve.
4. Maintenance bond
It guards a project owner against monetary losses caused by inadequate building work or subpar supplies. It typically lasts between 12 and 24 months. After that, the project owner may decide whether to impose this agreement or not. The usual price ranges from 1% to 15% of the guaranteed amount.
These are the most common types of agreements used, but other types can also be prepared according to the requirements.
Less common Construction bonds
Public work bonds:- It works similarly, but this agreement is needed at the state level for federal projects, state projects, or any other public project.
Site Improvement Bonds:- When a contractor is hired for a project that involves renovating a building, a site improvement bond assures that they will adhere to all current building rules and requirements.
Conclusion
A construction bond is a very crucial part of the construction industry as, without such an agreement, no party would like to proceed with the construction process. This is the only way to protect the interest of each party involved, like subcontractors, project owners, contractors, suppliers, and the government. So if you are looking to bid for a project, you can get your construction bond ready with the help of companies who prepare it for you.
